1
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-Q/A
For the quarterly period ended March 31, 2000
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13 and 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
__________________________________
CONSOLIDATED NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 1 TO FORM 10-Q
For the quarterly period ended March 31, 2000
The undersigned registrant hereby amends its first quarter Form
10-Q for the period ended March 31, 2000 to include the
restatement of the Company's financial statements for the
quarterly period ended March 31, 2000 to reflect the recognition
of an impairment of certain equity investments and the accrual
for a probable equity contribution to such investments.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED NATURAL GAS COMPANY
(Registrant)
/s/ S. R. McGreevy
S. R. McGreevy, Vice President,
Accounting and Financial Control
August 24, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q/A
___________
(Mark one)
_X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
___TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-3196
CONSOLIDATED NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 13-0596475
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
120 Tredegar Street
RICHMOND, VIRGINIA 23219
(Address of principal executive (Zip Code)
offices)
(804) 819-2000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
As of April 30, 2000, there were issued and outstanding 100
shares of the registrant's common stock, without par value, all
of which were held, beneficially and of record, by Dominion
Resources, Inc.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM
WITH THE REDUCED DISCLOSURE FORMAT.
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended March 31, 2000
TABLE OF CONTENTS
PART I-FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
for the Three Months Ended March 31, 2000 (Restated)
and 1999 1
CONDENSED CONSOLIDATED BALANCE SHEETS
at March 31, 2000 (Restated and Unaudited),
and December 31, 1999 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)for the Three Months Ended March 31, 2000
Restated) and 1999 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS 9
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Note: The financial statements in this report reflect the restatement
of the financial statements for the quarterly report ended March 31,
2000. See Note 11 to the consolidated financial statements.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Natural Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (Thousands of Dollars)
Three Months Ended
March 31
1999 2000
Restated
Note 11
Operating Revenues
Regulated gas sales $640,440 $626,760
Nonregulated gas sales 198,496 139,781
Total gas sales 838,936 766,541
Gas transportation and storage 181,565 184,222
Other 149,090 79,050
Total operating revenues 1,169,591 1,029,813
Operating Expenses
Purchased gas 461,958 415,474
Liquids, capacity and other products purchased 94,471 58,034
Restructuring and other merger-related costs 172,781 -
Operation expense 151,516 135,538
Maintenance 20,154 24,039
Depreciation and amortization 98,111 87,320
Taxes, other than income taxes 54,810 66,101
Subtotal 1,053,801 786,506
Operating income before income taxes 115,790 243,307
Income taxes (15,767) 75,663
Operating income 131,557 167,644
Other Income (Deductions)
Interest income 947 654
Loss on net assets held for sale (135,100) -
Other-net 4,562 (145)
Total other income (deductions) (129,591) 509
Income before interest charges 1,966 168,153
Interest Charges
Interest on long-term debt 31,074 26,560
Other interest expense 9,078 5,292
Allowance for funds used during construction (2,909) (2,686)
Total interest charges 37,243 29,166
Net Income (Loss) $(35,277) $138,987
The Notes to Consolidated Financial Statements are an
integral part of this statement.
The Company had no material other comprehensive income
reportable in accordance with Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive
Income, during the periods.
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
At At
March 31, December 31,
2000 1999
(Unaudited)
As Restated
(Note 11)
ASSETS
Property, Plant and Equipment
Gas utility and other plant $4,633,159 $4,648,120
Accumulated depreciation and amortization (1,991,982) (1,959,475)
Net gas utility and other plant 2,641,177 2,688,645
Exploration and production properties 4,582,313 4,392,319
Accumulated depreciation and amortization (2,957,878) (2,853,703)
Net exploration and production
properties 1,624,435 1,538,616
Net property, plant and equipment 4,265,612 4,227,261
Current Assets
Cash and temporary cash investments 39,610 93,891
Accounts receivable, less allowance for
doubtful accounts 575,352 526,902
Receivables from affiliated companies 7,231 -
Gas stored - current portion 12,418 86,312
Materials and supplies 18,747 20,336
Unrecovered gas costs 44,850 38,074
Deferred income taxes - current (net) - 674
Prepayments and other current assets 296,900 299,914
Net assets held for sale 564,288 371,508
Total current assets 1,559,396 1,437,611
Regulatory and Other Assets
Other investments 96,792 353,795
Deferred charges and other assets 589,908 516,552
Total regulatory and other assets 686,700 870,347
Total assets $6,511,708 $6,535,219
STOCKHOLDER'S EQUITY AND LIABILITIES
Capitalization
Common stockholder's equity
Common stock, no par value $2,391,888 $263,858
Capital in excess of par value 40,280 567,382
Retained earnings (134,917) 1,545,664
Treasury stock, at cost - (594)
Total common stockholder's equity 2,297,251 2,376,310
Long-term debt 1,764,115 1,763,678
Total capitalization 4,061,366 4,139,988
Current Liabilities
Commercial paper 549,226 685,731
Accounts payable 275,153 334,956
Estimated rate contingencies and refunds 39,787 44,914
Amounts payable to customers - 3,955
Payables to affiliated companies 5,258 -
Taxes accrued 126,164 134,257
Deferred income taxes-current (net) 3,325 -
Temporary replacement reserve - gas inventory 89,859 -
Other current liabilities 220,368 149,413
Total current liabilities 1,309,140 1,353,226
Deferred Credits
Deferred income taxes 758,975 808,031
Accumulated deferred investment tax credits 19,035 19,524
Deferred credits and other liabilities 363,192 214,450
Total deferred credits 1,141,202 1,042,005
Commitments and Contingencies
Total stockholder's equity and
liabilities $6,511,708 $6,535,219
The Notes to Consolidated Financial Statements are an integral part of
this statement.
ITEM 1. FINANCIAL STATEMENTS
(Continued)
Consolidated Natural Gas Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Thousands of Dollars)
Three Months Ended
March 31
1999 2000
Cash Flows Provided by (or Used in) Operating Activities
Net income (loss) $(35,277) $138,987
Adjustments to reconcile net income (loss)
to net cash provided by (or used in)
operating activities
Depreciation and amortization 98,111 87,320
Restructuring and other merger-related costs 170,296 -
Pension cost (credit)-net (18,388) (16,995)
Loss on net assets held for sale 135,100 -
Stock award amortization - 2,320
Deferred income taxes-net (39,198) 23,828
Changes in current assets and current
liabilities
Accounts receivable-net (47,708) (36,150)
Receivables from affiliated companies
consolidated (7,231) -
Inventories 75,483 104,670
Unrecovered gas costs (6,776) 10,771
Accounts payable (54,574) (136,099)
Payables to affiliated companies
consolidated 5,258 -
Estimated rate contingencies and refunds (5,127) (24,370)
Amounts payable to customers (3,955) (4,665)
Taxes accrued (7,519) 7,288
Temporary replacement reserve-gas inventory 89,859 108,080
Other-net 78,882 51,881
Net assets held for sale 24,036 -
Changes in other assets and other liabilities(70,189) 10,673
Other-net (213) 1,932
Net cash provided by operating activities 380,870 329,471
Cash Flows Provided by (or Used in) Investing Activities
Plant construction and other property additions
Acquisition of exploration and production
assets (106,270) (62,279)
Other (107,225) (107,366)
Proceeds from dispositions of property, plant
and equipment-net 7,754 (1,334)
Cost of other investments (1,755) (3,761)
Net cash used in investing activities (207,496) (174,740)
Cash Flows Provided by (or Used in) Financing Activities
Repayments of long-term debt - (4,000)
Commercial paper-net (134,791) (169,084)
Dividends paid (92,830) (46,267)
Purchase of treasury stock (34) (11,121)
Sale of treasury stock - 3,474
Net cash used in financing activities (227,655) (226,998)
Net decrease in cash and
temporary cash investments (54,281) (72,267)
Cash and Temporary Cash Investments at January 1 93,891 138,112
Cash and Temporary Cash Investments at March 31 $39,610 $65,845
Supplemental Cash Flow Information
Non-cash financing activities
Issuance of common stock under benefit plans $29 $88
__________
The Notes to Consolidated Financial Statements are an integral part
of this statement.
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) With the exception of the Condensed Consolidated Balance
Sheet at December 31, 1999, which is derived from the
Consolidated Balance Sheet at that date which was included in
Exhibit I to Consolidated Natural Gas Company's (CNG or the
Company) Form 8-K filed with the Securities and Exchange
Commission on January 27, 2000 (January 27, 2000 Form 8-K), the
consolidated financial statements are unaudited. In the opinion
of management, these unaudited consolidated financial statements
contain all adjustments, including normal recurring accruals,
necessary to present fairly the financial position as of March
31, 2000, and the results of operations and cash flows for the
three months ended March 31, 2000 and 1999.
Certain amounts in the 1999 consolidated financial statements
have been reclassified to conform to the 2000 presentation of
revenues, royalty expense, and production and reserves
statistics. This change conforms CNG's presentation to that
widely used by the industry.
Because a major portion of the gas sold or transported by the
Company's distribution and transmission operations is ultimately
used for space heating, both revenues and earnings are subject to
seasonal fluctuations. Seasonal fluctuations are further
influenced by the timing of price relief granted under regulation
to compensate for past cost increases.
The consolidated financial statements include the accounts of the
Company and its subsidiaries, with all significant intercompany
transactions and accounts being eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
These financial statements should be read in conjunction with the
consolidated financial statements, and notes thereto, included in
the January 27, 2000 Form 8-K.
(2) On January 28, 2000, Dominion Resources, Inc. (Dominion)
acquired all of the outstanding shares of CNG's common stock for
$6.4 billion, consisting of approximately 87 million shares of
Dominion common stock and approximately $2.9 billion of cash. The
acquisition was completed by merging CNG into a new subsidiary of
Dominion. The name of the new Dominion subsidiary was changed to
Consolidated Natural Gas Company at the time of the merger.
(3) Dominion and its subsidiaries developed and began the
implementation of a plan to restructure the operations of the
combined companies. The restructuring plan includes the following
components:
An involuntary severance program;
A transition plan to implement operational changes to
provide efficiencies, including the consolidation of post-merger
operations and the integration of information technology systems;
A voluntary early retirement program.
For the three months ended March 31, 2000, CNG recognized $172.8
million of restructuring and other merger-related costs as
discussed below:
Restructuring Liability Recognized At March 31, 2000
Dominion and its subsidiaries established a comprehensive
involuntary severance package for salaried employees whose
positions will be eliminated. Severance payments are based on the
individual's base salary and years-of-service at the time of
termination. Under the restructuring plan, approximately 400
employee positions at CNG and its subsidiaries have been
identified for elimination. Restructuring charges related to
workforce reduction costs approximating $43.7 million were
accrued in the first quarter of 2000, reflecting management's
best estimate of severance and related costs to be incurred under
the plan. At March 31, 2000, a total of 131 positions had been
eliminated, resulting in severance payments totaling $748,000.
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Restructuring and Merger-related Costs
Dominion has implemented a new hedging strategy for its combined
operations. Under its new strategy, Dominion created an
enterprise risk management group with responsibility for managing
Dominion's aggregate energy portfolio, including the related
commodity price risk, across its consolidated operations.
Previously, individual business segments managed their respective
energy portfolios and related price risk exposure on a stand-
alone basis. Dominion management believes this new structure
should result in a more effective risk management approach, thus
maximizing the value of Dominion's diversified energy portfolio
and market opportunities. As part of the implementation of the
new strategy, Dominion and CNG management evaluated CNG's hedging
strategy associated with its oil and gas operations in relation
to Dominion's combined operations. As a result of the evaluation,
CNG designated its portfolio of derivative contracts that existed
at January 28, 2000 as held for purposes other than hedging for
accounting purposes. This action required such contracts to be
carried at fair value in the balance sheet with unrealized gains
and losses included in the determination of net income. In
addition, the Company entered into "offsetting" contracts for
those contracts in the January 28, 2000 portfolio that would not
be settled during the first quarter of 2000. The mark-to-market
accounting for these contracts held for purposes other than
hedging resulted in the recognition of losses of $55.1 million
for the three months ended March 31, 2000. Due to the Company's
establishing the offsetting portfolio of derivative contracts,
absent any not yet identified future losses from credit risk
exposure, no additional losses are expected to result as these
derivative contracts mature through 2003. See Note 8 for further
discussion.
Settlement of certain employment contracts due to change of
control, resulting directly from the merger, totaled $30.9
million. The change of control also required payments of $25.7
million under seismic licensing agreements used in the Company's
oil and gas operations. Other costs included merger-related
transaction costs and fees totaling $9.2 million and accelerated
depreciation of information technology systems that will be
abandoned on January 1, 2001 and related conversion costs of $5.0
million.
CNG is expected to incur additional charges relating to
restructuring and other merger-related activities as business
operations are consolidated and administrative functions are
integrated.
Early Retirement Program
On January 28, 2000, Dominion and its subsidiaries announced an
early retirement program (ERP). This program is a voluntary
program for all salaried employees of CNG, excluding officers,
and employees of Virginia Natural Gas (VNG) and CNG
International. The early retirement option will provide up to
three additional years of age and three additional years of
employee service, subject to age and service maximums under the
retirement plan, for purposes of the benefit formula under the
retirement plan. Employees of CNG and its participating
subsidiaries who have attained age 52 and completed at least 12
years of service as of July 1, 2000 are eligible under the ERP.
To elect early retirement, eligible employees must notify the
companies during the period from April 3 through May 17.
The expense and related liability associated with the ERP will be
recognized upon the Company's receipt of eligible employees'
elections to accept the ERP. Employees who are involuntarily
terminated are also eligible to elect early retirement under the
ERP. However, the amount of severance pay may be subject to
reduction as a result of the additional retirement plan benefits
provided by the ERP. Whether the ERP is made available to
employees covered by collective bargaining agreements and the
period for electing to retire under the ERP is subject to
discussion with union representatives. At March 31, 2000, the ERP
had been accepted by one union.
(4) There have been no significant developments with regard to
commitments and contingencies, including environmental matters,
as disclosed in Notes 17 and 18 to the consolidated financial
statements included in the January 27, 2000 Form 8-K, nor have
any significant new matters arisen during the first quarter of
2000.
(5) Certain increases in prices by the Company and other
rate-making issues are subject to final modification in
regulatory proceedings. The related accumulated provisions
pertaining to these matters were $37.6 million and $38.7 million
at March 31, 2000, and December 31, 1999, respectively, including
interest. These amounts are reported in the Condensed
Consolidated Balance Sheet under "Estimated rate contingencies
and refunds" together with $2.2 million and $6.2 million,
respectively, which are primarily refunds received from suppliers
and refundable to customers under regulatory procedures.
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) At March 31, 2000, the Company's net assets held for sale
include the net assets of VNG of $342.0 million. CNG is required
to spin-off or sell VNG pursuant to conditions set forth by the
Virginia State Corporation Commission and Federal Trade
Commission in connection with their approval of the acquisition
of CNG by Dominion. See Note 10 for additional information on the
sale of VNG.
At March 31, 2000, the Company's net assets held for sale also
include the net assets of CNG International of $222.3 million.
CNG International engages in energy-related activities outside of
the United States and holds equity investments in Australia and
Argentina. Consistent with its strategy to focus on its core
business, in the first quarter of 2000, management committed to a
plan of disposal for CNG International. The total loss related to
CNG International, discussed below, for the three months ended
March 31, 2000 was $135.1 million ($87.8 million after tax).
In the three months ended March 31, 2000, the Company recognized
a pretax loss of $35.1 million ($22.8 million after taxes) to
write down the carrying amount of CNG International's Australian
investments to estimated fair value less cost to sell. The
Company's estimate is based principally on a discounted cash flow
analysis. In addition, the Company believes it is probable that,
as part of a sale, it will be required to make a $100 million
equity contribution pursuant to the Equity Contribution Agreement
discussed in Note 14 to the consolidated financial statements
included in the January 27, 2000 Form 8-K filed by CNG.
Accordingly, the Company has recognized a $100 million ($65
million after taxes) charge in the three months ended March 31,
2000. As a result, the Company has reduced the March 31, 2000
carrying value of CNG International's Australian investments and
recognized charges of $135.1 million ($87.8 million after-tax) in
the first quarter of 2000.
(7) The Financial Accounting Standards Board has issued an
Exposure Draft proposing amendments to SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities. If adopted,
the proposed new accounting standard will become effective with
the implementation of SFAS No. 133. The Exposure Draft addresses
various implementation issues including expanded availability of
exclusions of normal purchase and normal sale agreements from
classification as derivatives. The Company is in the process of
assessing the impact and method of adoption of SFAS No. 133 and
has not estimated the financial impact of adoption. To the
extent that any of the contracts are subject to fair value
accounting, implementing appropriate hedging strategies could
possibly mitigate the potential impact on earnings volatility.
(8) Dominion has implemented a new hedging strategy for its
combined operations. Under its new strategy, Dominion created an
enterprise risk management group with responsibility for managing
Dominion's aggregate energy portfolio, including the related
commodity price risk, across its consolidated operations.
Previously, individual business segments managed their respective
energy portfolios and related price risk exposure on a stand-
alone basis. Dominion management believes this new structure
should result in a more effective risk management approach, thus
maximizing the value of Dominion's diversified energy portfolio
and market opportunities.
As part of the implementation of the new strategy, Dominion and
CNG management evaluated CNG's hedging strategy associated with
its oil and gas operations in relation to Dominion's combined
operations. As a result of the evaluation, CNG designated its
portfolio of derivative contracts that existed at January 28,
2000 as held for purposes other than hedging for accounting
purposes. This action required a change to mark-to-market
accounting where derivative contracts are carried at fair value
in the balance sheet with any future unrealized gains and losses
included in the determination of net income. At January 28, 2000,
the fair value of the derivative contracts represented a net
unrealized loss of approximately $69.8 million. This net
unrealized loss will be included in the determination of net
income, as an adjustment to revenues, through net settlement
accounting as such contracts mature through 2003. At March 31,
2000, approximately $56.2 million of the $69.8 million of net
hedging losses are included in Deferred Charges and Other Assets,
pending future settlement of the related contracts.
In addition, CNG entered into "offsetting" contracts for those
contracts in the January 28, 2000 portfolio that would not be
settled during the first quarter of 2000. Up to the date that the
offsetting contracts were entered into, the mark-to-market
accounting for the original portfolio resulted in a loss of
approximately $55.1 million for the three months ended March 31,
2000. Due to the Company's establishing the offsetting portfolio
of derivative contracts, absent any not yet identified future
losses from credit risk exposure, no additional material losses
are expected to result as these derivative contracts mature
through 2003. Related to these contracts, a liability
representing future contract settlements of approximately $97.5
million is reported in Deferred Credits and Other Liabilities at
March 31, 2000.
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following chart describes the contracts from the original
January 28, 2000 portfolio that have not yet matured, for which
offsetting contracts have been entered, at March 31, 2000:
Original Portfolio
Related Commodity
Contract
Type of Instrument Item Quantity Maturity
Options ("collars") Natural Gas 90 Bcf, on a net
basis 2003
Oil 3,850,000 barrels 2000
Swaps Natural Gas 108 Bcf 2003
During the first quarter of 2000, Dominion began the
implementation of the new risk management strategy. Accordingly,
CNG and its subsidiaries entered into new derivative contracts
and designated them as hedges of sales of future oil and gas
production. At March 31, 2000, unrealized gains and unrealized
losses related to these contracts were approximately $6.2 million
and $14.1 million, respectively. CNG's hedging portfolio of
derivative contracts related to its oil and gas exploration and
production operations at March 31, 2000 follows:
Current Hedging Portfolio
Hedged Commodity
Type of Instrument Item Quantity Maturity
Options ("collars") Natural Gas 26.9 Bcf, on a
net basis 2001
Oil 2,908,000 barrels 2001
Swaps Natural Gas 75.8 Bcf, on a
net basis 2000
Oil 2,562,000 barrels 2000
The net deferred losses at March 31, 2000 on the original hedging
portfolio of contracts and the current hedging portfolio of
contracts, to the extent realized, should generally be offset by
future sales revenue from oil and gas production.
(9) The Company is organized primarily on the basis of products
and services sold in the United States. For a detailed
description of the Company's business segments, reference is made
to Note 19 to the consolidated financial statements included in
the January 27, 2000 Form 8-K. Corporate and Eliminations
includes the effects of the restructuring and other related costs
and the impairment of CNG International's Australian investments
for the first quarter 2000 as the individual segments were not
held accountable for the charges. Note that 1999 segment
information has been restated to reflect the inclusion of
Dominion Field Services, Inc., formerly CNG Field Services
Company, in the Transmission segment (previously included in
Other).
<TABLE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<CAPTION>
Exploration
and Corporate and
Distribution Transmission Production Other Eliminations Total
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Three Months ended March 31, 2000
Nonaffiliated operating revenues $727,746 $169,537 $203,846 $55,077 $---- $1,156,206
Affiliated operating revenues 1,278 61,027 20,998 10,065 (79,983) 13,385
Operating income before income
taxes 161,164 81,097 52,832 3,144 (182,447) 115,790
Net income (loss) 95,387 47,754 31,312 2,105 (211,835) (35,277)
Gas Sales (In Bcf) 102.2 23.0 44.4 16.5 (14.8) 171.3
Gas Transportation (In Bcf) 73.6 240.0 .2 - (51.7) 262.1
Three Months ended March 31, 1999
Nonaffiliated operating revenues $708,812 $141,672 $130,241 $49,088 - $1,029,813
Affiliated operating revenues 1,822 51,099 11,054 48 (64,023) -
Operating income before income
taxes 156,626 72,070 18,010 (525) (2,874) 243,307
Net income 90,556 42,573 10,834 264 (5,240) 138,987
Gas Sales (In Bcf) 107.4 14.4 39.3 13.6 (10.3) 164.4
Gas Transportation (In Bcf) 65.6 252.7 .1 - (60.3) 258.1
On May 8, 2000, Dominion and CNG reached an agreement with AGL Resources Inc
(AGL) regarding the sale of VNG. AGL will pay from $500 million to $550 million
in cash depending upon the final structure of the sale. The parties expect the
sale to close by December 31, 2000.
(10) Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2000, the Company's management
determined that an impairment loss on certain equity investments in Australia
held by CNG International and an accrual for a probable equity contribution to
such investments should have been recognized during the quarterly period ended
March 31, 2000. These items are more fully described in Note 6. As a result,
the financial statements for the quarterly period ended March 31, 2000 have been
restated to properly recognize these amounts. A summary of the significant
effects of the restatement is as follows (amounts in thousands):
</TABLE>
As Previously As
Reported Restated
As of March 31, 2000
Net assets held for sale $593,788 $564,288
Total assets 6,541,208 6,511,708
Other current
liabilities 120,368 220,368
Deferred income taxes 804,275 758,975
Retained earnings (50,717) (134,917)
For the three months ended March 31, 2000
Loss on net assets held
for sale $...... $135,100
Income tax expenses
(benefit) 31,533 (15,767)
Net income (loss) 52,523 (35,277)
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS
Forward-Looking Information
Certain matters discussed in this Form 10-Q, including
Management's Discussion and Analysis of Results of Operations,
are "forward-looking statements" intended to qualify for the safe
harbors from liability established by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements
can generally be identified as such because the context of the
statement will include words such as Consolidated Natural Gas
Company (CNG or the Company) "believes," "anticipates," "expects"
or words of similar import. Similarly, statements that describe
the Company's future plans, objectives or goals are also forward-
looking statements. Such statements may address future events
and conditions concerning the Company's acquisition by Dominion
Resources, Inc. (Dominion), capital expenditures, earnings, risk
management, litigation, environmental matters, rate and other
regulatory matters, liquidity and capital resources, and
financial accounting and reporting matters. Actual results in
each instance could differ materially from those currently
anticipated in such statements, due to factors such as: natural
gas and electric industry restructuring, including ongoing state
and federal activities; the weather; demographics; general
economic conditions and specific economic conditions in the
Company's distribution service areas; developments in the
legislative, regulatory and competitive environment in which the
Company operates; and other circumstances affecting anticipated
revenues and costs.
Subsequent to the issuance of the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000, the
Company's management determined that an impairment loss on
certain equity investments in Australia held by CNG International
and an accrual for a probable equity contribution to such
investments should have been recognized during the quarterly
period ended March 31, 2000. These items are more fully
described in Note 6 to the consolidated financial statements.
RESULTS OF OPERATIONS
A major portion of the gas sold or transported by the Company's
distribution and transmission operations is ultimately used for
space heating. As a result, earnings are affected by changes in
the weather. Because most of the operating subsidiaries are
subject to price regulation by federal or state commissions,
earnings can be affected by regulatory delays when price
increases are sought through general rate filings to recover cer
tain higher costs of operation.
Three Months Ended March 31, 2000 and 1999
System Results
The Company's net loss for the first three months of 2000 was
$35.3 million, compared with net income of $139.0 million in the
first three months of 1999. The net loss reflects primarily the
effects of restructuring and merger-related costs associated with
CNG's acquisition by Dominion and an impairment loss on a foreign
investment held for sale. Merger-related costs associated with
CNG's acquisition by Dominion and the impairment loss reduced net
income by $117.9 million and $87.8 million, respectively. See
Notes 3 and 6 to the consolidated financial statements. In
addition, operations were affected by comparatively milder
weather. Weather in the first quarter of 2000 was 7 percent
warmer than 1999 and 12 percent warmer than normal resulting in
lower distribution sales and transmission transport volumes.
Higher oil and gas wellhead prices, increased gas production and
higher by-product prices were positive factors in the 2000
quarter.
Operating Revenues
Regulated gas sales revenues increased $13.7 million, to $640.4
million, in the first three months of 2000 compared to the prior
year period due to higher sales prices. Average sales rates for
all three customer groups increased compared to the 1999 quarter
reflecting higher purchased gas prices in first quarter of 2000.
Sales volumes decreased 4.9 billion cubic feet (Bcf) to 102.2 Bcf
due to milder weather. Sales volumes decreased for the Company's
residential and commercial customers, while sales volumes
increased for industrial customers. Nonregulated gas sales
revenues increased $58.7 million, to $198.5 million, with sales
volumes increasing 11.8 Bcf to 69.1 Bcf, due in large part to
increased gas sales in 2000 by Dominion Field Services, Inc.,
formerly CNG Field Services Company.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS (Continued)
Gas transportation and storage revenues decreased $2.6 million in
the first three months of 2000, to $181.6 million reflecting
lower gas transportation volumes and slightly lower rates at
Dominion Transmission, Inc., formerly CNG Transmission
Corporation. This decrease was partially offset by increased gas
transportation revenues at the Company's distribution operations
and increased gas storage revenues.
Other operating revenues increased $70.0 million in the first
three months of 2000, to $149.1 million. Revenues from the sale
of oil and condensate production increased $12.4 million due to
higher prices. Brokered oil sales increased $36.9 million
reflecting relatively flat volumes but a sharp rise in oil
prices. Revenues from the sale of products extracted from natural
gas increased $17.2 million in the first quarter of 2000 as a
result of higher by-product sales prices.
Operating Expenses
Operating expenses, excluding income taxes, increased $267.3
million in the first three months of 2000, to $1.05 billion.
Purchased gas increased $46.5 million, to $462.0 million. This
increase reflects an approximate 10 percent increase in average
gas prices during the first quarter 2000 as compared to the 1999
quarter on relatively flat volumes of gas purchased and withdrawn
from storage. Liquids, capacity and other products purchased
increased $36.5 million, to $94.5 million, due chiefly to
increased prices for oil purchased to satisfy brokered oil sales.
Restructuring and other merger-related costs totaling $172.8
million were incurred in connection with CNG's acquisition by
Dominion in the first quarter of 2000 (see Note 3 to the
consolidated financial statements). Combined operation and
maintenance expense in the first quarter of 1999 was $171.6
million, an increase of $12.0 million compared to the prior year
quarter. This increase reflects primarily an increased accrual
for uncollectible customer accounts as a result of conforming
CNG's credit policy to that of Dominion. Depreciation and
amortization increased $10.8 million, to $98.1 million, due
chiefly to the acquisition of additional producing properties in
late 1999 and early 2000. Taxes, other than income taxes,
decreased $11.3 million, to $54.8 million, reflecting lower Ohio
excise taxes and the discontinuance of Pennsylvania gross
receipts tax as of January 1, 2000. This decrease in gross
receipts taxes was accompanied by a decrease in revenues as
customer collections for this tax ceased for gas services
provided on or after January 1, 2000.
Income taxes decreased $91.4 million in the first quarter of 2000
reflecting lower pretax income as compared to the first quarter
of 1999.
Other Income (Deductions)
For the first quarter of 2000, the Company reported other
deductions of $129.6 million as compared to other income of $.5
million for 1999. Other deductions for the first quarter of 2000
reflect primarily the $135.1 million pretax loss recorded to
adjust the carrying amount of CNG International's Australian
assets and the accrual for a probable equity contribution
associated with these investments. See Note 6 to the Consolidated
Financial Statements and the Divestitures section below for more
information.
Interest Charges
Total interest charges increased in the first quarter of 2000, as
compared to the prior year quarter, reflecting higher levels of
long-term debt and higher interest rates on commercial paper
during the comparative periods.
In connection with the discussion of results of operations,
reference is also made to Note 5, 8 and 9 to the consolidated
financial statements.
Business Segment Results
Distribution
Operating income before income taxes of the gas distribution
operations was $161.2 million for the first three months of 2000,
up $4.6 million from the same quarter in 1999. This moderate
increase reflects higher gas transport volumes and higher average
sales rates in first quarter 2000 compared to the 1999 quarter.
These
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS (Continued)
factors helped offset the effect of lower gas sales due to
comparatively milder weather in the 2000 quarter. Total
distribution throughput in the first quarter of 2000 increased
2.8 Bcf, to 175.8 Bcf, reflecting lower residential and
commercial gas sales volumes due to comparatively milder weather
offset by increased transport volumes, primarily to industrial
and off-system customers. Average sales rates were higher for all
customer classes, reflecting higher purchased gas costs.
Residential gas sales volumes decreased 5.1 Bcf in the first
three months of 2000 to 78.0 Bcf due to the milder weather in the
2000 quarter. The distribution operations transported 8.1 Bcf of
gas for residential customers in the first quarter of 2000,
compared to 7.7 Bcf in 1999. Sales to commercial customers did
not change materially from first quarter 1999 levels while
volumes transported to these customers increased 1.6 Bcf to 19.7
Bcf. Total sales to industrial customers was also flat for the
first quarter of 2000 compared with the prior year while
transport volumes were up 3.7 Bcf to 41.8 Bcf. Off-system
transport volumes increased 2.3 Bcf in the first quarter 2000 to
4.0 Bcf.
Transmission
Operating income before income taxes of the gas transmission
operations in the first quarter of 2000 was $81.1 million, up $9
million from $72.1 million in the first quarter 1999. These
results primarily reflect higher prices for natural gas by-
products and lower taxes other than income taxes partially offset
by lower gas transport revenues. Dominion Field Services, Inc.
recorded a pretax operating loss in the first quarter 2000 due to
the bankruptcy of one of its customers, and produced a moderate
contribution to operating income before income taxes for the 1999
quarter.
Gas transportation revenues decreased approximately $9.8 million
for the first quarter 2000 reflecting a decrease in transport
volumes of 12.7 Bcf, or 5 percent, due largely to milder weather
in the first quarter of 2000 as compared to the prior year
quarter. Revenues from the sale of natural gas by-products
increased $12.8 million for the first quarter of 2000 as compared
to the same quarter in 1999 reflecting sharply higher prices for
all products, which more than offset a 9 percent decrease in
volumes.
Exploration and Production
The exploration and production operations reported operating
income before income taxes of $52.8 million in the first three
months of 2000, compared to $18.0 million in the first quarter of
1999. Operating results for the first quarter of 2000 reflect
higher gas and oil wellhead prices and a 9 percent increase in
gas production.
The Company's average gas wellhead price was $2.56 per thousand
cubic feet (Mcf) in the 2000 first quarter, $.50 per Mcf higher
than the 1999 quarter. Gas production in the first three months
of 2000 was 40.1 Bcf, up 3.5 Bcf from 36.6 Bcf in 1999. The
Company's average oil price was $14.67 per barrel in the first
quarter of 2000, compared to $8.28 in the prior year period. Oil
production of 1.9 million barrels in the first quarter of 2000
did not change significantly from first quarter 1999 levels.
Other
Operating income before income taxes for "Other" increased $3.7
million in the first quarter of 2000 compared to the prior year
period reflecting higher operating income at CNG Retail.
Other Information
Year 2000
CNG experienced a successful transition to the Year 2000 and
through February 29, 2000. The Company's natural gas production,
transmission, and distribution systems continued to operate
smoothly through the transition periods. CNG's customers have
not experienced natural gas service interruptions as a result of
a Year 2000 problem. The Company expects no significant Year
2000 problems in the future.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS (Continued)
Year 2000 costs of $13 million have been expended as of March 31,
2000. Additional costs for the remainder of 2000 are anticipated
to be insignificant.
CNG cannot estimate or predict the potential adverse consequences
that could result from a third party's failure to effectively
address remaining Year 2000 issues, if any, but believes that any
impact would be short-term in nature and would not have a
material adverse impact on results of operations.
Restructuring Costs
CNG is expected to incur additional charges relating to
restructuring and other merger-related activities as business
operations are consolidated and administrative functions are
integrated. The planned workforce reductions and the accelerated
depreciation in 2000 of information technology systems that will
be abandoned on January 1, 2001 should avoid future annualized
operating costs of approximately $38 million that would have
otherwise been incurred.
Divestitures
CNG is required to spin-off or sell Virginia Natural Gas (VNG)
pursuant to conditions set forth by the Virginia State
Corporation Commission and Federal Trade Commission in connection
with their approval of the acquisition of CNG by Dominion. On May
8, 2000, Dominion and CNG reached an agreement with AGL Resources
Inc (AGL) regarding the sale of VNG. AGL will pay from $500
million to $550 million in cash depending upon the final
structure of the sale. The parties expect the sale to close by
December 31, 2000.
CNG International engages in energy-related activities outside of
the United States and holds equity investments in Australia and
Argentina. Consistent with its strategy to focus on its core
business, in the first quarter of 2000, management committed to a
plan of disposal for CNG International. The Company recognized a
loss related to CNG International in the three months ended March
31, 2000 of $135.1 million ($87.8 million after tax). The Company
believes it is probable that, as part of a sale of its Australian
investments, it will be required to make a $100 million equity
contribution pursuant to the Equity Contribution Agreement
discussed in Note 14 to the consolidated financial statements
included in the January 27, 2000 Form 8-K filed by CNG. See Note
7 to the consolidated financial statements.
PART II-OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
As previously reported, the Company and the directors party to
the suit were served with a purported Class Action Complaint,
Civil Action No. 17114-NC, styled Gerold Garfinkel v. Raymond E.
Galvin, Paul E. Lego, Margaret A. McKenna, William S. Barrack,
Jr., Steven A. Minter, J. W. Connolly, George A. Davidson, Jr.,
Richard P. Simmons, and Consolidated Natural Gas Company. On or
about March 15, 2000, the Parties submitted a Stipulation of
Dismissal to the Court.
A class action was filed by Quinque Operating Co. and others
against approximately 300 defendants, including the Company and
several of its subsidiaries, in Stevens County Kansas. The cases
have been consolidated with the Grynberg case, as previously
reported, and have been stayed pending the ruling on the motion
to dismiss.
CNG's interstate natural gas pipeline, Dominion Transmission,
Inc. is involved in several proceedings before the Enforcement
Section of the Office of the General Counsel at the Federal
Energy Regulatory Commission. These proceedings concern an audit
of Dominion Transmission's compliance with marketing affiliate
regulations, certain storage well drilling practices, and a
matter affecting capacity allocation for the pipeline's services.
These proceedings are in various stages of discovery, and their
outcome cannot be determined at this time. The Company does not
anticipate that these proceedings will result in a material
adverse effect to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 Dominion Resources, Inc. Incentive Compensation Plan, as
restated effective April 16, 1999 (Exhibit 10(xiv), Dominion
Resources, Inc. Form 10-K for the fiscal year ended December
31, 1999, File No. 1-8489, incorporated by reference).
27 Restated Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K;
The Company filed a Current Report on Form 8-K/A, dated April 4,
2000, relating to the change in certifying accountant for the
Company.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CONSOLIDATED NATURAL GAS COMPANY
(Registrant)
/s/ S. R. McGreevy
S.R. McGreevy
VicePresident
Accounting and Financial Control
August 24, 2000
